New boost from Europe to impact investing

On 8 March 2018, the European Commission published a communication on its action plan for financing sustainable growth. Debate around regulatory barriers to social investment has been a hot topic in the UK for some time and it appears that the UK regulator’s hand will be forced through some of the changes proposed in the Commission’s plans.

Aim of the EC

The Commission is seeking to address the fact that current levels of investment are not sufficient to support an environmentally and socially sustainable economic system. It aims to do this by redirecting capital flows towards sustainable investment.

It will also manage financial risks stemming from climate change, resource depletion, environmental degradation and social issues, and foster transparency and long-termism in financial and economic activity.

Lowdown on the action plan

In particular, actions relating to matters including the following are identified in the plan:

• Establish an EU classification system for sustainable activities.

The aim here is to embed the future EU sustainability taxonomy in EU law, and legislative proposals are due to be shared during Q2 2018.

• Create standards and labels for green financial products.

These will seek to build on the EU sustainability taxonomy. Criteria would be explored for specific financial products offered to retail investors (such as Packaged Retail Investment and Insurance Products)

• Financial advisors will need to include their clients’ ESG preferences as part of the suitability process

This will require changes to the current rules within MiFID II and the IDD and the intention is for this to occur through in Q2 of 2018. Following on from this ESMA will update its guidelines on suitability assessments to include provisions on sustainability by Q4 2018.

• Develop sustainability benchmarks

Access to and an ability to better assess the quality of sustainability benchmarks is another goal of the action plan. This will require changes to the Benchmarking Regulation in Q2 of 2018 and the Commission also plans harmonising benchmarks comprising low-carbon issuers by publishing a report on the design and methodology by Q2 of 2019.

The Commission plans to carry out a comprehensive study on sustainability ratings and research by Q2 of 2019.

• Clarify institutional investors' and asset managers' duties to take sustainability into account

The Commission will make proposals by Q2 2018 to (i) explicitly require institutional investors and asset managers to integrate sustainability considerations in the investment decision-making process and (ii) increase transparency towards end-investors on how they integrate such sustainability factors in their investment decisions. This may require changes to both MiFID II and AIFMD.

• Incorporate sustainability in prudential requirements.

The Commission will assess whether more appropriate capital requirements could be adopted to better reflect the risk of sustainable assets held by banks and insurance companies.

Next steps

Some of the above changes are likely to occur quickly given the 2018 deadlines. The Commission will also report on the implementation of the action plan in 2019.